This Growth Stock Just Crushed Earnings. Is It Time to Buy Now?

The stock market endured a tough start to 2022. In particular, growth stocks took it on the chin in the first half of the year.

Audio streamer Spotify (SPOT 2.06%) was one of the worst performers. By May, the company’s shares were down more than 60% year to date. Shortly after that, Chief Executive Officer Daniel Ek announced that he had bought $50 million worth of Spotify shares.

Since then, Spotify has staged a rally. Shares gained more than 20% in July alone, helped by the company’s recent earnings report.

I think Spotify can keep building on its recent momentum and could be one of the biggest winners in the second half of 2022. And there’s a simple reason why.

Image source: Spotify.

Spotify just crushed earnings (but not earnings per share)

Here’s something that confuses investors: A company announces that it has missed earnings-per-share expectations, then its stock immediately jumps 5% or more. 

That’s exactly what happened last week to Spotify, which reported a loss of 85 euro cents per share versus an estimated loss of 63 euro cents per share. But Spotify rallied on the report. So what’s that about? Why didn’t the stock go down?

It’s all about the market’s priorities. For a growth stock like Spotify, the market prioritizes two things:

  • Positive growth
  • Upbeat guidance

If a company can deliver on these two points, the market will overlook near-term operating losses. 

Growing the business

On the growth front, the market wants to see key metrics increasing, such as revenue, paid subscribers, and monthly active users. Rising figures show that the underlying business is healthy, and that management is effectively executing its business plan. Spotify crushed it on each of these metrics.

Metric Q2 Actual Q2 Estimate % Above Estimate Year-Over-Year Change
Monthly active users (MAUs) 433 million 428 million 1.1% 19%
Paid subscribers 188 million 187 million 0.5% 14%

Data source: Spotify Q2 report.

Revenue was up 23% year over year, and beat guidance. Monthly active users (MAUs) soared to 433 million, well above expectations of 428 million. Moreover, total paid subscribers rose to 188 million — one million more than the company had forecast. 

Positive guidance

But it’s not enough to just report solid numbers. There’s the second part of the equation: Positive guidance.

Positive guidance gives the market clarity regarding where the business is going. It helps analysts and investors see where a company is putting its assets to work and allows management to guide expectations based on company- or industry-specific conditions. Spotify aced the earnings report by delivering stellar guidance in addition to its solid second-quarter results.

The company expects accelerating growth in MAUs and paid subscribers in the third quarter. What’s more, it anticipates its revenue to cross the 3-billion-euro mark for the first time in the third quarter.

Spotify is a buy now

There’s no doubt about it: Things are looking up for Spotify. Despite reporting a larger-than-expected operating loss, the company has reaffirmed its optimistic forecasts for revenue, subscriber, and user growth. Moreover, its CEO has doubled down by putting $50 million of his own money on the line. 

For investors looking for a growth stock with solid long-term prospects, now looks like a great opportunity for buying Spotify.

Jake Lerch has positions in Spotify Technology. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.

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